The US intends to break the WTO to deal with the 'multi-trillion dollar problem' that is China

The United States intends to break the World Trade Organisation (WTO) in order to deal with the "multi-trillion dollar problem" that is China and stop it gaining economic supremacy, a former diplomat to the WTO told Business Insider.

Trump will likely raise $200 billion in fresh tariffs against China before the midterm elections, Hosuk Lee-Makiyama told BI, breaking the WTO and effectively ending an era of free trade that has lasted for 23 years.

Europe, Japan and the US are now working together to tackle the Chinese "problem" that they all face.

They want to address the "uneven playing field" that the state controlled economic policies of China have created - as its GDP balloons past $11.6 trillion.

The United States intends to break the World Trade Organisation (WTO) in order to solve the "multi-trillion dollar problem" that is China, a former diplomat to the WTO told Business Insider.

The US administration has gone on the offensive to push China into playing by its trade rules in order to "level the playing field," and has now moved to an all-out trade war which could effectively nullify the WTO, the advisor said.

The $200 billion in sanctions threatened against China, on top of existing tariffs, would equal around 50% of Chinese exports to the United States. If the Chinese were to retaliate they would have to cover almost all US exports to China.

"At that stage you can basically say that the United States has expelled China out of the WTO and itself on the way," said Hosuk Lee-Makiyama, director of the European Centre for International Political Economy, and Sweden's former envoy to the WTO. "And I don't think the current administration minds that much because they think that basically the system as we have it now is not really working for them anymore."

Smaller countries too would have to raise their tariffs in that event, crashing an era of WTO control and free trade that has lasted over 23 years.

Trump's Trade War Policy

President Donald Trump, in town to support Gov. Henry McMaster, speaks to the crowd at Airport High School, Monday, June 25, 2018, in West Columbia, S.C. Richard Shiro/AP

President Trump has been heavily criticized for the trade offensive, but advisers from the Obama administration have reportedly been working on "the China dossier" for years and have run out of options.

"I have a lot of friends in the US administration who used to belong to the Democrats who have been working on the China dossier for decades, who were saying: 'look we have tried everything, we have tried the incentives thing, we have tried to put a little bit of pressure, we might just as well try total war because this is the only thing remaining.'"

Lee-Makiyama believes Trump will announce the $200 billion in fresh Chinese tariffs before the midterm elections, a move that would appeal to his voter base and cement his power both in the Republican party and the oval office.

The policy also has logic to it. China is a "multi-trillion dollar problem" for the US because of its ballooning $11.2 trillion GDP and its state-supported economy which have produced an advantage that the US, but also the EU and Japan, want to end.

President Obama tried to use The Trans Pacific Partnership (TPP) to gather allies in the pacific basin into a united economic front against China, but Trump is trying a different bilateral approach to leverage an advantage.

"This is all an extension of the idea that the multilateral order is not working out for the United States anymore because you [the US] can no longer change the rules to your advantage or in your own interest," said Lee-Makiyama.

This is all an extension of the idea that the multilateral order is not working out for the United States anymore

"The United States is just taking it to the next level."

Trump's move against China seems to working. On June 27 the Shanghai Composite market showed Chinese stocks down 22% since January 2018, and on April 10 President Jinping conceded that Chinese auto tariffs have been too high.

Europe, Japan and the "Global Level Playing Field"

On May 31, the same day that Trump imposed steel tariffs against the EU, Europe joined the US dispute against China, focusing on uneven technology transfers.

Europe, Japan and the US have created a trilateral dialogue called the "Global Level Playing Field" to tackle China and the status-quo maintained under the WTO.

"Despite everything you see going on between Trump and the Europeans, they are actually sitting down to talk about the common problem with China," Lee-Makiyama said.

"If you look at the steel tariffs it's worthwhile, just a couple of billion [whereas] China is a multi-trillion dollar problem."

The Rise of China

U.S. President Donald Trump and China's President Xi Jinping chat as they walk along the front patio of the Mar-a-Lago estate after a bilateral meeting in Palm Beach, Florida, U.S., April 7, 2017. REUTERS/Carlos Barria

But critics of Trump's policy believe he is accelerating the decline of the US and the rise of China.

Craig VanGrasstek, a public policy lecturer at Harvard and a former consultant to the WTO and the World Bank told Business Insider: "We are alienating our allies, we are angering countries which, if not identified before as allies, were our trade partners."

"The net result of the Trump administration, however many years it lasts, is likely to be one of accelerating the decline of the United States and equally accelerating the advance of China."

The WTO and the US just didn't see the state-led capitalism of "China Inc" coming, said Hosuk Lee-Makiyama, who expects more political turmoil ahead.

"It is a good thing for the United States and Europe and Japan that China is growing and that they are becoming rich," he said. "The European economy as well as the American one depends on the Chinese becoming richer."